“Germany is particularly feeling the shocks”

The right reaction to weak growth and inflation were the key issues at the IMF’s annual conference. In addition to the governments, the central banks are required. The IMF considers it necessary for the European Central Bank (ECB) to continue raising interest rates. The US Federal Reserve should also “stay on course” with its rate hikes.

Read the full interview here:

Ms. Gopinath, Germany is facing a recession. In recent years, Germany has been seen as an anchor of stability in the euro zone. Will the country now become the sick man of Europe again?
The German economy recovered well after the corona pandemic. But Russia’s war against Ukraine and rising energy prices, especially for natural gas, are hitting Germany particularly hard. But Russia’s lack of natural gas deliveries are also leaving their mark in Italy and many Eastern European countries.

But when it comes to economic growth, Germany is now at the bottom of Europe. The IMF expects the German economy to shrink by 0.3 percent in the coming year, more than in many other countries.
Germany has a larger industrial sector than other countries. And these companies were already struggling with the interrupted supply chains during the corona pandemic, and now the rapidly increasing energy costs are added to this. Germany is an industrial location and is therefore currently feeling the effects of these shocks particularly clearly.

In Germany, some are already warning of de-industrialization. Is the concern justified?
This winter will be difficult, but the winter of 2023 could be even worse. The energy crisis will not disappear so quickly, energy prices will remain high for a long time. Germany must react to this. The expansion of renewable energies must be significantly accelerated. And it needs energy supplies from other countries that are reliable. The federal government is working on both, and it is necessary.

>> Read here: IMF lowers economic forecast for Germany

The IMF expects the Russian economy to contract by 2.3 percent next year, slightly less than expected. Does this mean that the sanctions imposed by western countries are not having the desired effect?

We’ve cranked growth in Russia up from our earlier assumptions, but it’s still lower than before the war. The reason for the increase is that energy prices have risen significantly. Oil exports from Russia remain strong, although they are now going to other countries. Russia was also very active in terms of fiscal policy. The bottom line is that Russia is a country that is increasingly being cut off from international business. So the sanctions are definitely having a noticeable effect.

Despite the economic downturn, Federal Finance Minister Christian Lindner wants to end the expansive fiscal policy and adhere to the debt brake in the coming year. He points to high inflation. Is he right?
Yes, I think the finance minister’s approach is correct. In many countries, inflation is higher than it has been for decades, and Germany is one of them. Everything must be done here to bring down inflation. The European Central Bank is raising interest rates. But fiscal policy should also make its contribution. Therefore, our advice is to refrain from an expansive fiscal policy.

On the other hand, the state should relieve citizens and companies because of the rising energy costs. And he has to make massive investments, for example to accelerate the energy transition. How does that fit together?
This is not about a short-term stimulus package, but about an improvement on the supply side, for example in energy. These are structural investments that run for years and increase the potential for economic growth. In addition, in recent years, a large proportion of government spending has been used to combat the pandemic. That’s gone now. The state is therefore able to reduce the budget deficit, even if it also provides targeted help for citizens and companies in the energy crisis.

While the US Federal Reserve is raising interest rates significantly to combat inflation, the European Central Bank is acting much more cautiously. Should the ECB step up the pace?
There are reasons for the different approach. As an energy exporter, the USA is benefiting from the increased prices. The euro countries, on the other hand, are importers, which is why rising energy prices are dampening economic growth here. The ECB takes this into account. Growth in the euro zone will weaken significantly, we expect only 0.5 percent for the coming year. That should lower inflationary pressures. Nevertheless, it is right if the ECB normalizes its monetary policy by the end of the year and then follows a tighter course in the coming year.

The new government in Great Britain is viewed critically by the financial markets. What do you think of the plans, which include very active fiscal policy, tax cuts and increasing debt?
The same applies to Great Britain as to other countries: these are very difficult times. The high inflation rates that we are seeing are a problem precisely because they cannot be brought down again so quickly. That then impacts inflation expectations, and that can slow down future economic and job growth. For this it is important that inflation is fought. And that is only possible if fiscal policy plays along.

However, this is not the case.
One can and should certainly help those most in need in society. But there is a way that can be done without expanding fiscal policy altogether.

The Fed’s interest rate policy is a key topic at the IMF meeting. After all, the value of the dollar also increases with interest rates, which causes problems for emerging countries in particular. Does the Fed need to pay more attention to these effects?
I think the Fed is taking these so-called effects into account because, if they are large, they will also be felt in the US. The question then is: Should central banks in certain countries intervene if their currency is noticeably weakened compared to the strong dollar?

And what is the answer?
In principle, we do not recommend interventions in the foreign exchange markets instead of macroeconomic adjustments. The large fluctuations in the currencies are mainly due to the fact that the USA is raising interest rates faster than Europe, for example, and that Japan is not tightening monetary policy at all, while China is even lowering interest rates. It could therefore make sense in individual and limited cases for central banks to intervene to support their own currency – especially if there are turmoil in the markets. But an important message from the meeting here is that we are in difficult times and it is likely to get even harder. Therefore, we advise you to keep the powder dry.

We’re in tough times, and it’s likely to get tougher. Gita Gopinath

Should the Fed take a pause in fighting inflation, or at least slow down to avoid turbulence in the markets?
Inflation is still very persistent. Core inflation…
… where volatile food and energy prices are factored out …
… has even increased recently. The labor market is still very strong. If the Fed were to signal in such an environment that it was no longer tightening monetary policy as planned, this would involve a major loss of credibility. Therefore, they should stay the course in view of the economic data.

Ms. Gopinath, thank you very much for the interview.

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